By CRAIG HARRIS, P-I REPORTER

Published 10:00 pm, Wednesday, January 30, 2008

Starbucks will say goodbye to its breakfast sandwiches, close about 100 underperforming U.S. locations and slow down the number of domestic openings as the once-go-go coffee company retools itself amid a slowing economy.

The changes, announced Wednesday along with modest first-quarter earnings, also include putting more emphasis on overseas expansion. Few stores will be closed in the Pacific Northwest, and employees at the shuttered stores will be transferred to other sites, said Chairman Howard Schultz, who took over as chief executive Jan. 7.

"It's important to understand a new day is here," Schultz said in an interview with the Seattle P-I after the earnings release. "We want to put the customer at the forefront of every decision we make, and we want to exceed their expectations at what we are doing."

Schultz, who replaced fired CEO Jim Donald, said a five-point plan on a "catalyst for change" would be revealed at the company's annual meeting March 19. While still growing the company, Schultz wants to return Starbucks to its roots of intimate coffee houses with unique drinks where baristas connect with customers.

Problems became public nearly one year ago when Schultz sent out a Valentine's Day memo, called "The Commoditization of the Starbucks Experience," lamenting challenges within Starbucks and the "watering down" of the company.

One way to turn back the clock is getting rid of the breakfast sandwiches, even though they bring in significant revenue and were seen as a way to compete for morning sales with McDonald's Corp., which is going head-to-head with Starbucks on coffee sales.

Starbucks employees had long complained the smell of egg-and-cheese sandwiches overpowered the aroma of coffee and cheapened the store experience, and Schultz agreed. He said input from baristas during the past three weeks influenced his decision.

The move to eliminate the sandwiches, which bring in more than $100 million in annual revenue, was "a tough decision, but it's a very easy decision on what is at stake," Schultz said. "For 35 years we have ethically sourced and roasted high-quality coffee by passionate people, and we should not do anything in the stores that is in conflict with that."

Schultz also said China remained the big prize for international growth, but the company also plans to move into Hungary and Poland. In 2009, Starbucks for the first time is planning to open more international stores than U.S. outlets.

"International will offset some of the weakness in the U.S. market," Schultz said.

Starbucks Corp. said profits for the quarter ended Dec. 30 totaled $208.1 million, a 2 percent increase compared with $205 million in net income a year ago. The earnings of 28 cents per share beat by a penny the estimate of Wall Street analysts. Revenue increased 17 percent to $2.77 billion, compared with $2.36 billion for the first quarter of 2007.

Schultz, who took Starbucks public in 1992 and was CEO from 1987 to 2000, is trying to resurrect the company's slumping stock price. Last year, shares dropped 42 percent, and the stock price closed Wednesday at $19.22, a nearly 4 percent drop from the previous day, on the Nasdaq stock market. Shares dropped slightly in after-hours trading, after the company's announcements.

Some analysts said they were disappointed more specific details weren't released.

"It's very difficult to get excited about the story," said Patricia Edwards, a retail analyst at Wentworth, Hauser and Violich in San Francisco. "It's one of those 'trust me' stories, but it (Starbucks) hasn't earned the trust in the last year or two."

Schultz said stores would begin phasing out breakfast sandwiches through the current fiscal year, which ends Sept. 28, and they would be replaced with a healthy alternative.

"Customers have told us they want a healthy breakfast alternative, and no one has responded to that need," Schultz told analysts in a conference call.

Schultz didn't say what the company would sell in place of the sandwiches, which bring in about $35,000 in annual sales per store. But he told the P-I the company's food group would deliver a product that "wouldn't dilute the integrity or romance of coffee."

The company declined to disclose the precise number of stores selling the sandwiches, but it said the sandwiches were in 3,000 to 4,000 stores.

Based on those figures, the company could lose $105 million to $140 million in annual revenue. Schultz said the sandwiches had a small profit margin compared with coffee, but he did not disclose figures.

The company, which during the last quarter opened about eight stores a day, said it would open about five stores a day for the rest of the fiscal year.

Despite the slowdown, Starbucks still is the largest gourmet coffee chain in the world with 15,756 stores in 43 countries, including the U.S.

In November, the company started feeling a pinch from a slowing economy, and it lowered its estimated 2008 worldwide openings by 100 stores to 2,500 net new stores. That figure was lowered again Wednesday to 2,150 stores. The number of projected U.S. store openings will drop from 1,600 to 1,175, while the number of foreign stores will increase from 900 to 975.

In 2009, the company for the first time is projecting to open more stores overseas than in the U.S., which will have fewer than 1,000 new stores.